By Neelabh Chaturvedi
Nigeria's impending inclusion in JPMorgan Chase & Co's ( JPM ) benchmark emerging markets debt index could spark capital inflows into the West African country's debt market and free up funds that could be lent to companies and households, analysts said. JPMorgan will add Nigeria to its Government Bond-Emerging Markets Index in three phases beginning October, it said in a research note issued Wednesday. Nigeria will possess a weight of roughly 0.59% in the index, which has about $ 170 billion of assets under management benchmarked against it. Nigeria's inclusion in the index will prompt investors and asset managers who track the index to buy the country's bonds to match changes. Inflows could total $1 billion over the coming months, said Giulia Pellegrini, an economist and strategist for Sub-Saharan Africa at JPMorgan. Capital inflows could even exceed that figure as Nigerian bond yields on average are more than twice as high as the yield of the JPMorgan index, Pellegrini said. "Inclusion in the index is also likely to make some of these inflows steadier, as the index has become the benchmark for most investors in this asset class," she said in a written response to questions. "Moreover, it raises the visibility of the Nigerian bond market on the international scene, placing what has been so far deemed a 'frontier' market a step closer to more mainstream investment destinations." The move follows Citigroup Inc.'s ( C ) announcement in June that South Africa will join its World Government Bond Index in October, the first African nation among the 22 other sovereign bond markets on that index. South African Reserve Bank Governor Gill Marcus said in July that inclusion will likely bring capital from U.S. pension funds and other institutional investors into South Africa and raise the rand's value against the U.S. dollar.
News of Nigeria's inclusion sparked a rally in the country's currency--the naira--which rose to a more than three- month high against the U.S. dollar. The 10-year bond yield fell slightly Thursday, to 16%. As yields and prices move in opposite directions, that signals some buying. With foreign interest in Nigerian bonds set to pick up, pressure might ease slightly on domestic banks to support the local bond market. As such, some of the funds that were locked in debt markets may now find their way to the private sector, analysts said. A gush of foreign capital inflows will likely stoke demand for local equities and other assets, and bolster the currency. Nigeria, a member of the Organization of Petroleum Exporting Countries, relies on oil exports for more than 90% of its foreign-exchange earnings and about 80% of government revenue. "Inflows of $1 billion would help the central bank keep the currency stable," said Charles Robertson, global chief economist at Renaissance Capital in London. Still, Robertson does not anticipate bond yields to fall sharply just yet, noting that concerns over inflation have kept them fairly high. The annual inflation rate rose to 12.90% in June from 12.70% in May. Nigeria sold its first-ever bond on international capital markets last January, raising $500 million from a 10-year bond sale aimed at establishing a benchmark for the nation's corporations and banks. The inaugural deal priced at 98.223 for a yield of 7%. In its twice-yearly World Economic Outlook published in May, the International Monetary Fund said growth in Nigeria is expected to remain largely static at around 7% this year.
nasdaq.com/article/nigerias-inclusion-in-jpmorgan-bond-index-to-spur-capital-inflows-20120816-00719

4 Play: This is actually rare good news. Not going to get much comments as our forumites are too benighted to comprehend such articles.

The 10-year bond yield fell slightly Thursday, to 16%.

The yield on 10-year Spanish bonds dropped 12 basis points, or 0.12 percentage point, to 6.52 percent at 5:05 p.m. London time, the lowest level since July 12 and a fourth day of declines. The 5.85 percent security due January 2022 rose 0.785, or 7.85 euros per 1,000-euro ($1,236) face amount, to 95.31.http://www.businessweek.com/news/2012-08-16/spanish-italian-notes-snap-gain-amid-spain-bank-aid-speculation

The yield on benchmark Italian 10-year bonds rose above 6pc, which is considered the point at which borrowing costs become unsustainable. A higher yield indicates less demand. http://www.telegraph.co.uk/finance/financialcrisis/9300845/Italian-bond-yields-rise-above-6pc-danger-level.html

But going forward, government has decided that next year, any borrowed money whether local or foreign should be tied to specific projects. This is an additional control that government want to introduce to ensure that there is effective utilization of resources- Abraham Nwankwo, November 15, 2010.

HNosegbe: I'm sorry, but permit me to be skeptical about this issue. First, look at this:



Where on earth does a government continue to issue debt instruments with such high yield? Even in Spain and Italy, two of Europe's troubled economies, the yield on 10-year bonds is less than 7 percent.



Check the link below for yield on Italian bonds.


Secondly, can anyone tell us what specific projects these bonds will be tied to? Weren't we promised by the Debt Management Office that all bonds raised by Nigeria will be project-tied? What infrastructural project in Nigeria can justify borrowing at a rate of 16 percent?


http://www.businessdayonline.com/NG/index.php/markets/bond-market/16143-bond-issues-to-be-project-tied-from-next-year

My problem is not with Nigeria borrowing, because debt can be deployed to good purposes. The rule of thumb is that the returns (for a business) and societal welfare (in the case of a government) derivable from deploying the funds generated from the loan MUST surpass the interest being paid on the loan. Seen in this light, the question is whether this debt profile is sustainable given the high interest being paid on these loans.

I am simply NOT COMFORTABLE with this arrangement.

HNosegbe: Below is the bond yield for Ghana, SA and Indonesia as requested.

Ghana: 5-8% (http://www.bloomberg.com/news/2012-08-08/ghana-eurobond-yields-seen-to-reach-record-low-on-exports-1-.html)

SA: 7.67% (http://af.reuters.com/article/southAfricaNews/idAFL6E8JH2MM20120817)

Indonesia: 5.68% (http://www.thejakartaglobe.com/business/indonesia-bond-yields-at-five-month-low-on-growth-rupiah-steady/535889#Scene_1)

And yet the rate on 10-year locally-denominated Nigerian government bonds averages 16.3% (http://www.cenbank.org/rates/govtsecurities.asp). It is SIMPLY RIDICULOUS.

The 10-year bond yield fell slightly Thursday, to 16%. As yields and prices move in opposite directions, that signals some buying.

My problem is not with Nigeria borrowing, because debt can be deployed to good purposes. The rule of thumb is that the returns (for a business) and societal welfare (in the case of a government) derivable from deploying the funds generated from the loan MUST surpass the interest being paid on the loan. Seen in this light, the question is whether this debt profile is sustainable given the high interest being paid on these loans.

I am simply NOT COMFORTABLE with this arrangement.

wesley80: ^ No one is comfortable with borrowing, not governments, not economists, not even the man who's very next meal depends on it and certainly, not me. But fact is, we have to borrow sometimes. Question is should Nigerians be rejoicing at this listing and potential foreign borrowing? Yes, yes and yes.
To put this in perspective, if we had a stronger economy much better than SA's, had huge domestic debts of over 30% and do not even have huge capital projects to fund, this listing would still make perfect sense and would still be a remarkable economic feat. In the absence of even all these, I really can not understand the cynicism - don't forget this still is merely a "listing".
The reasons for borrowing could be manifold but what cannot be denied is the desirability of foreign cash, the multiplier effect of getting in $1b would be the equivalent of borrowing about $3b - $6b locally not to mention the positive domino effect it would have on local private investments and lending rates.
I kinda understand your discomfort with our borrowing giving our history, the watchword as always is 'caution' and setting a threshold to gauge what's acceptable, that said, the immediate benefits of this listing and inflow of non FDI's far outweighs the inherent risks.

HNosegbe: Errr... It's "good luck", not "Goodluck". Always use the separator to distinguish between a wish and a name.